Activity Related Market Response and Self-Organized Criticality: Evidence from the Pharmaceutical Industry
Posted: 8 May 2001
This paper investigates the nature of stock price changes in response to activity level adjustments at an individual firm level using a methodology based on the theory of "self-organized criticality" [SOC], adapted from the physical sciences. The motivation to investigate activity level arises from its documented ability to describe and explain a firm?s behavior. Activity is modeled as a self-organized critical variable, which is expected to vary directly with performance and stock prices below the critical level (called the sub-critical activity), and vary indirectly above this level (called the supra-critical activity). The critical activity level is called the "attractor" of a firm's dynamics because, ceteris paribus, changes in activity level from the sub-critical or supra-critical levels take the firm towards the critical activity level.
Our study extends prior research using SOC. Market evaluations of such changes imply that activity is a fundamental economic triggering process that can explain variations in stock prices. The results, based on the analysis of 40-quarter data, generally support the hypothesized expectations that stock price directly associates with adjustments in activity level, and that stock prices fall (rise) when the firm operates in supra (sub) critical activity levels. These findings also suggest the usefulness of activity data from the stakeholders' standpoint.
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